Allstate is also imposing an average 2.1 percent increase on top of the 5.9 percent for homeowners in some coastal and near-coastal counties, including Harris and Montgomery.

Since Aug. 20, the company has been imposing new rates on customers as they renew.

The judge's decision only addresses whether the department gave proper notice before blocking Allstate's rates, not whether the state's second-largest insurer's rates are excessive, said Rod Bordelon, head of the Office of Public Insurance Counsel, which represents consumers at rate hearings.

The Insurance Department had argued that Allstate implemented the rates before filing the rates with the department.

"I believe it's an incorrect ruling," Bordelon said. "I believe the statute is clear that you can't implement a rate prior to filing it, and that's what Allstate did."

Allstate contends it followed proper procedure.

"Allstate has believed throughout the entire process and continues to believe that we are doing what is responsible and right for the customer," company spokesman Bill Mellander said.

Allstate Texas Lloyds, which has 600,000 customers in the state, maintains it needs the rate increase to generate enough capital to pay claims in a catastrophe.

"We were disappointed by the judge's opinion," department spokesman Jerry Hagins said. "It does not change our position that Allstate's rates are excessive."

In another attempt to challenge Allstate, the department issued an order on Oct. 5 demanding Allstate pay refunds and interest of 14.3 percent to policyholders who were charged the higher rates.

The refunds and interest would total about $95 million, Hagins said.

Mellander said Allstate will likely fight the order.

August beginnings

The rate battle began when on Aug. 20, the date Allstate filed for the rate increase, Texas Insurance Commissioner Mike Geeslin issued an order halting the rate increase, calling it excessive.

A few days later, Allstate won a temporary restraining order on the grounds that state law requires Geeslin to give a company 20 days notice before blocking or lowering a rate that already is in effect.

Allstate has also since been placed under "prior approval," which means it must get the department's approval before implementing new rates.

Other insurers can file a rate and immediately use it under a system adopted in 2003 called "file and use."

One trade group said the department's actions undermine the 2003 law change.

"Texas regulators seem to be having a tough time coming to grips with the fact that file-and-use laws can create a spirited market-based environment where insurers duke it out in a competitive atmosphere for the lowest prices and innovative products," Sandra Helin, a spokeswoman for Southwestern Insurance Information Service, said in an e-mailed statement.

But two state senators said the Allstate case and the long-running court battle by State Farm over rate refunds ordered by the insurance commissioner four years ago show the need to revisit the rate regulation law.

"Two of the largest companies are trying to use the shield of the court to raise rates even though the Texas Department of Insurance thinks they're excessive," said Sen. Troy Fraser, R-Horseshoe Bay.

Law review likely

Fraser, chairman of the Senate Business and Commerce Committee and co-chairman of a joint Senate-House insurance oversight committee, said he expects there will be ample opportunity to review the file-and-use law, including the 2009 Sunset Act review of the Texas Department of Insurance.

He said the 2003 law was enacted in the context of a mold crisis that sparked $4 billion in claims, and lawmakers compromised with the industry to allow insurers to react quickly with rate hikes.

"The mold crisis has gone away and with it a lot of the huge outlays they were paying. We have got to determine if file and use is still in the best interest of the state," Fraser said.

The author of Senate Bill 14, Sen. Mike Jackson, R-La Porte, said Allstate may have found a loophole in the law that needs to be closed.

"Our goal was to make sure that consumers across the state of Texas had the ability to buy insurance at affordable rates and that the insurance commissioner would have oversight to prove that rates charged were not excessive," he said. "If this lawsuit removes his ability, I will be the first in line to file legislation that would give him that ability."